Investing in Rental Properties
There are several ways to invest in real estate. It can actually be broken down into two categories: investing in a property with the intention to resell it for a profit and investing in a property long-term and renting it.
One benefit of investing in a rental property is that it has the potential to provide two types of return. 1) It can provide appreciation over the long-term if its value increases over time and/or due to improvements that are made. Also, as the mortgage is paid down over time, equity in the property will increase. 2) It has the potential to have an ongoing return in the form of positive cash flow earned by renting the property out to tenants for monthly payments that exceed the owner’s overall monthly expenses to maintain the property.
If an investor can secure good financing for a rental property that can produce positive cash flow in an appreciating market, and they are willing to take on the responsibility of managing the property (or hiring a professional property management company to manage the property), rental property investing can be a profitable investment. It is important to understand tough, that investing in rental property, like any other investment, carries risk, and there are no guarantees of a return.
Investment Strategy for Rental Properties
To determine whether a rental property investment can work for you, you should have an accurate estimate of what kind of ROI (return on investment) the property is likely to generate. Return on investment (ROI) is calculated by dividing profit earned on an investment by the cost of that investment, however, the ROI calculation is more complicated than this, so it’s a good idea to speak to someone who is familiar with real estate investment strategy. When you attempt to determine ROI potential in advance of investing in a rental property, there are many variables that can affect both the income potential and the expenses of the property. Determining the possible ROI of an income producing property will require you to make estimates (based on data that is available) on market rental rates, vacancy rates of similar properties in the area, ongoing expenses for maintaining and operating the property, and other variables that might change at any time. Keep in mind, as we stated above, rental property investments carry risk of loss just as any other type of investment, and returns are not guaranteed.
How to Determine a Good Rental Property
You’ll need to consider some criteria while searching for a good rental property to invest in. If you’re looking for a residential rental property like a single-family home or a small apartment complex, you may want to focus your search within areas that homes are appreciating in value, have low crime, strong employment, and high rated schools. Once you narrow your search to a certain area, make some basic calculations to get a better sense of how well the property might be able to generate income.
Your goal should be to find a rental property that can generates positive cash flow, the rent, and any other income you earn on the property that is greater than its expenses such as the mortgage payment, property management fee, monthly (calculated) property taxes, repairs, insurance, etc. Keep in mind, though, that these calculations are complicated. You should always seek a professional in this field to be able to account for all the variables that may arise. Failure to consider even one up front or ongoing expense can lead you to an incorrect estimate of the cost and income potential. The list of expenses may include agent/broker commission for acquiring the property, mortgage fees, cleaning and maintenance, repairs, utilities, insurance, advertising for tenants, mortgage interest, property management, your time and expense traveling to and from the property, taxes and tax-return prep, legal fees, the costs to replace appliances, and more. It’s probably impossible to know in advance all the expenses your rental property may require. So, as you calculate a property’s income potential, it’s important to gather as much information on the property and similar properties in the area that you can, and then solicit the help of a professional to determine if the property you are interested in may work for you.
Financing a Rental Property
Financing an income property is typically more difficult than financing a primary residence; the major distinction being the amount required for the down payment. Where homebuyers with strong credit can find financing opportunities that require just a few percent down on a primary residence, investors are typically required to put down at least 20%. There are also other “creative” financing options that may be available. For example, you can ask for “seller financing” or “owner financing.” In this case the property owner would serve as the bank or mortgage company, and you put an amount of money down for the purchase and promise a certain amount each month, just as you would do with a traditional mortgage. This type of transaction in a lot of ways is like a standard mortgage arrangement in that your credit and good name are just as much on the line for satisfying the mortgage as they would be if the loan were held by a mortgage company or bank. You may also be able to raise the needed down payment through other means, such as by taking out a home equity line of credit on your primary residence or other property you own.
In Conclusion
Investing in real estate can be risky, but you can also enjoy the many potential benefits, including the chance to have a long-term return through appreciation of the property and the chance to enjoy ongoing income. We at Logical Choice Realty Group work with many of real estate investors from all over the world that purchase income properties in Southwest Florida. If you or someone you know are thinking about purchasing investment property in our area, call us today.
